Elements of Negotiability Flashcards
Negotiability
1
Q
Elements of Negotiability
A
(1) An unconditional
(2) promise or order to pay
(3) a fixed amount of money, with or without interest
(4) payable to order or to bearer
(5) payable on demand or at a definite time and
(6) does not state any other promise or instruction, except to (a) give, maintain, or protect collateral; (b) authorization to confess judgement or collect collateral; or (c) waivers of rights designed to protect obligor
2
Q
WOOPS FUN (Negotiability)
A
W = Writing ( part of "promise" and "order" O = Order or Bearer O = On demand or at a Definite Time P = Promise or Order to Pay S= Signed (part of "promise" and "order") F = Fixed amount of money with or without interest U = Unconditional N = No authorized undertaking or instruction
3
Q
Promise
A
A written undertaking to pay money signed by the person undertaking to pay
4
Q
Order
A
A written instruction to pay money signed by the person giving the instruction
5
Q
Signed
A
Any symbol or writing executed or adopted with the present intention to adopt or accept a writing
6
Q
Payable at a definite time
A
Payable at a fixed date or dates including on elapse of a definite period of time and extensions to a definite time at the option of the maker or acceptor or automatically upon or after a specified act or event. If payment date is uncertain it is not negotiable.
7
Q
If an instrument is undated
A
The effective date is the date of issuance.
8
Q
Issue
A
The first delivery of an instrument by the maker or drawer, whether to a holder or non holder, for the purpose of giving rights on the instrument to any person
9
Q
Payable to Bearer
A
An instrument is payable to bearer if it
(1) states that us payable to bearer;
(2) does not state a payee; or
(3) states that is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person
10
Q
Payable to Order
A
An instrument is payable to order if it is payable to (a) the order of an identified person or (b) to an identified person or order
11
Q
Payable on Demand
A
An instrument is payable on demand if it does not state any time of payment
12
Q
Express v. Implied Condition
A
An express condition defeats negotiability of an instrument but an implied condition does not
13
Q
Defeats negotiability
A
(a) the note is subject to a contract, (b) the note is subject to the security agreement executed by the parties contemporaneously herewith, or (c) rights and obligations fo the parties with respect to this note are stated in the contract
14
Q
Does not make conditional
A
A promise or order is not made unconditional by
(a) the reference to another record for statement of rights with respect to collateral, prepayment or acceleration;
(b) because payment is limited to resort to a particular fund or source; or
(c) a waiver of the benefit of any law intended for the advantage or protection of an obligor
15
Q
Interest Rate
A
The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument
16
Q
Order Language
A
Order language is needed on notes intended to be negotiable; however no order language is needed for an instrument in bearer form
17
Q
Certified Check
A
A check accepted by the bank which it is drawn.
Acceptance means the drawee’s signed agreement to pay a draft as represented. It must be written on the draft and may consist of the drawee’s signature alone
18
Q
Cashier’s Check
A
A draft with respect to the which the drawer and drawee are the same bank or branches of the same bank
19
Q
Teller’s Check
A
A draft by a bank on another bank or payable through a bank
20
Q
Incomplete Instrument
A
a signed writing, whether or not issued by the signer, the contents of which show at the time of signing that it is incomplete but that the signer intended it to be completed by addition of words or numbers
21
Q
Signed but payee omitted
A
An incomplete instrument that is a negotiable instrument payable ‘to bearer’ since it identifies no payee
22
Q
Payee’s name is filled in
A
Ig an incomplete instrument is a negotiable instrument it may be enforced according to its terms if it is not completed, or according to its terms as augmented by completion
23
Q
Signed but amount left blank
A
Results in an incomplete instrument BUT it is not a negotiable instrument because it is not an order to pat a FIXED AMOUNT OF MONEY
24
Q
The agreed upon amount is filled in
A
If incomplete instrument is negotiable, it may be enforced according to its terms if it is not completed, or according to its terms as augmented by completion
25
Person Entitled to Enforce
(a) the holder of an instrument
(b) a non holder in possession of the instrument who has the rights of a holder
(c) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d) [The lost instrument provision]
26
Holder
The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession
27
Holder of Bearer Paper
Have possession of the instrument
28
Holder of Order Paper
Have possession of the instrument AND be the identified person
29
Negotiation
Means a transfer of possession, whether voluntary or involuntary of an instrument by a person other than the issuer to a person who thereby becomes its holder
30
Negotiate Instrument Payable to an Identified Person
Negotiation requires:
(a) transfer of possession of the instrument; and
(b) its indorsement by the holder
31
Negotiate Instrument Payable to Bearer
Negotiation requires either voluntary or involuntary transfer of possession
32
Holder of Order Paper
Holdership requires:
(a) having possession of the instrument; and
(b) being the identified person
33
Holder of Bearer Paper
Holdership requires:
| (a) having possession of the instrument
34
Indorsement
A signature, other than that of the signer as a maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (a) negotiating the instrument ...for the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is part of the instrument
35
Special Indorsement
Indorsment identifies a person to whom it makes the instrument payable to
36
Blank Indorsement
When endorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed
37
Delivery
Voluntary transfer of possession
38
Shelter Principle
Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferred any right of the transferor to enforce the instrument. (Ex. a non holder in possession fo the instrument who has the rights of a holder)
Allows transferee to become PETE when negotiation fails for lack of indorsmsent
39
IF an instrument is transferred for value and the transferee does not become a holder because of the lack of indorsement by the transferor,
THEN, the transferee has a specifically enforceable right to the unqualified indorsement of the instrument, but negotiation of the instrument does not occur until the indorsement is made
40
Unauthorized Signature
is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes for value.
41
Forged Indorsement on Order Paper
Makes any further purported indorsement ineffective
42
Unauthorized signature
Means signature made without actual, implied, or apparent authority. Term includes forgery
43
What happens when an indorsement is forged?
Forgery of a necessary indorsement breaks the chain of title and makes any further indorsement ineffective
44
Misspelled Indorsement
The person to whom payment is to be paid is the person to whom the signer intended even if misspelled
45
Alternatively Payable
If an instrument is payable to two or more people alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument
46
Not Alternatively Payable
If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.
47
Payable to Two or More ambiguously
If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.
48
Primary Liability
Liability of makers and acceptors is called "Primary" because there are no conditions for liability
49
Secondary Liability
Liability of drawer and indorser. However, the liability is not triggered until dishonor occurs.
50
Liability of Issuer
Obliged to pay the instrument according to its terms at the time it was issued to PETE. Issuer = Maker
51
Two or more Persons Liable on Instrument
If two or more persons have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees or anomalous endorsers are jointly and severally liable in the capacity in which they sign.
52
Liability of an Acceptor
A signed agreement to pay the draft as presented obliges the acceptor to pay the draft:
(a) according to its terms at the time it was accepted; and
(b) the obligation runs to the PETE
53
When is a person liable on an instrument?
A person is not liable on an instrument when:
(a) the person signed the instrument; or
(b) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person.
54
Who can bring a "wrongful dishonor" claim?
Only the customer of the bank may have a claim for wrongful dishonor.
55
Liability Independent of Check
Contract - Was there a promise made? Was there consideration?
Promissory Estoppel - If Bank made a promise, did X rely on it?
Fraudulent Misrepresentation? Negligence? Did Bank make a misstatement about facts?
56
Recourse after Dishonor
If an unaccepted draft is dishonored, the drawer is obliged to pay the draft:
(a) according to its terms at the time it was issued
(b) to the PETE
57
Drawer v. Maker's Liabilty
```
The Maker (issuer of the note) is obliged to pay the instrument
The Drawer is obliged to pay the draft if an unaccepted draft is dishonored.
Drawer's obligation is conditional in that it requires dishonor, whereas the maker's does not.
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58
Dishonor
If a draft is payable on demand and paragraph 1 does not apply, the draft is dishonored if
(a) presentment for payment is duly made to the drawee; and
(b) the draft is not paid on the day of presentment 3.502(b)(2)
59
Presentment
Means a demand made by or on behalf of a person entitled to enforce an instrument to pay the instrument made to the drawee or a party obliged to pay the instrument
60
Acceptor
Obligation of an acceptor who signs the instrument runs to a PETE
61
Indorser's Contract
IF an instrument is dishonored, an endorser is obliged to pay the the amount of the instrument due on the instrument:
(a) according to the terms of the instrument at the time it was endorsed ... the obligation of the indorser is owed to the PETE
62
Presentment Required
IF
(a) the note is not payable on demand AND ...
(b) the terms of the note require presentment, THEN
the note is dishonored if presentment is duly made and the note is not paid on the day it becomes payable or the day of presentment, whichever is later
63
Presentment NOT Required
IF
(a) the note is not payable on demand; and
(b) it note does not require presentment
THEN, the note is dishonored if it is not paid the day it becomes due
64
Presentment not usually required
In the great majority of of cases presentment is waived with respect to notes. In most cases a formal demand for payment is not contemplated. Raterm the maker is expected to send payment to the holder of the note on the date or dates ion which payment is due
65
Waiver of Presentment
Maker expressly waives presentment, demand, notice of dishonor, protest, and all other demands and notices in connection with this Note
66
IF Note has a Waiver of Presentment
THEN Dishonor occurs on the day payment is due if not paid according to its terms
67
Indorser's Notice of Dishonor
The obligation of an indorser may not one enforced unless:
(a) the indorser is given notice of dishonor of the instrument complying with this section or (b) notice of dishonor is excused under section 3-504(b) [waiver]
3-503(a)
68
Notice - Indorser's Liability on Notes
Presentment and notice of dishonor typically are not necessary to enforce the endorser's liability, because they have been waived in the instrument.
69
Notice - Indorser's Liability on Checks
It is highly unlikely that presentment and notice of dishonored are waived in a check or other draft, so they will be necessary to enforce the indorser's liability on those instruments.
70
Timeframe for Notice of Dishonor
With respect to an instrument taken for collection by a collecting bank... with respect to any other instrument, notice of dishonor muse be given within 30 days following the day on which dishonor occurs. 3-503(c)
71
Indorser's Liability Discharged
Failing to give timely notice of dishonor to an endorser discharges the endorser's liability all together
72
Indorser's Recourse
If an indorser who is made to pat on his indorser's contract may recover from the maker
"The issuer of a note ... is obliged to pat the instrument (a) according to its terms at the time it was issued to a PETE or to an endorser who paid the instrument under section 3-415
73
Special Rule for Depository Bank
If a customer delivers an item to a depository bank for collection; (a) the depository bank becomes a holder of the item at the time it receives the item for collection if the customer at the time of delivery was a holder of the item, whether or not the customer endorses the item.
74
Dishonor of an Unaccepted Draft
If a check is duly presented for payment to the payor bank otherwise than for immediate payment over the counter, the check is dishonored of the payor bank makes timely return of the check or sends the timely notice of dishonor or nonpayment under 4-301 or 4-302 [Midnight Deadline]
75
Midnight Deadline for Banks
Means midnight on tis next banking day following the banking day on which it receives the relevant item
76
Dishonor Midnight Deadline Bank
With respect to an instrument taken for collection by a collecting bank, Notice of Dishonor must be given (a) by the bank before midnight of the next banking day following the banking day on which bank receives notice of dishonor
77
Indorsement Without Recourse
If an indorsement states that it is made 'without recourse' or otherwise disclaims liability on the indorser, the endorser is not liable under subsection (a) to pay the instrument
78
Drawer Dsiclaims Liability
A disclaimer of liability stated in subsection (b) is not effective if the draft is a check 3-414(d)
79
Time of Presentment
Drawer: within 30 days of date
Indorser: within 30 days of indorsement
80
When is a drawer discharged?
(a) presented after 30 days
(b) drawee suspends payment after 30 days
(c) drawer is deprived of funds
(d) drawer assigns rights
81
Liability of Principal
IF a person acting, or purporting to act, as a representative signs and instrument by signing either
(a) the name of the represented person; or
(b) the name of the signer,
THEN the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract
82
Unauthorized Signature
A signature made without actual, implied, or apparent authority is ineffective except as the signature of unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value.
83
Actual Authority
P explicitly tells A that A has the legal authority to engage in some act or perform some actions
84
Implied Authority
P's words or conduct reasonably lead A to believe that A had the authority to engage in or to perform some act
85
Apparent Authority
P's words or conduct lead the 3rd party to reasonably believe the A has the legal authority to engage in the particular action
86
Agent Not Liable
If a
(1) representative signs the name of the representative to an instrument; and
(2) the signature is an authorized signature of the represented person, the following rules apply:
(3) if the form of the signature shows unambiguously that the signature is made on behalf of the represented person,
(4) who is identified on the instrument
THEN, the representative is not liable on the instrument
87
Agent Is Liable
If a
(1) representative signs the name of the representative to an instrument; and
(2) the signature is an authorized signature of the represented person, the following rules apply:
(3) if the form of the signature does not show unambiguously that the signature is made in a representative capacity or
(4) the represented person is not identified on the instrument,
THEN, the representative is label on the instrument to a HDC that took the instrument without notice that the representative was not intended to be liable on the instrument
88
Agent Allowed to Rebbutt Liability
If a
(1) representative signs the name of the representative to an instrument; and
(2) the signature is an authorized signature of the represented person, the following rules apply:
(3) if the form of the signature does not show unambiguously that the signature is made in a representative capacity or
(4) the represented person is not identified on the instrument,
With respect to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument
89
Agent Not Allowed to Rebbutt Liability
(3) if the form of the signature does not show unambiguously that the signature is made in a representative capacity or
(4) the represented person is not identified on the instrument,
THEN, the representative is liable on the instrument to a HDC that took the instrument without notice that the representative was not intended to be liable on the instrument AND the representative cannot offer evidence to prove that he as not meant to incur liability.
90
Agent Liability Test
1) Did A sign his own name?
2) Did A have authority to sign for P?
3) Is A's signature and capacity ambiguous?
4) is the Principal identified?
91
Represented Person Account on Check
If a representative signs the name of the representative as drawer of a check without indication of the representative status and the check is payable from the account of the represented person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person.
92
Surety
One who promises to pay the debt or obligation of another person
93
Guarantor
Accommodation Party
94
Is there an accommodation party?
If an instrument is issued for value given for the benefit of a party to the instrument (accommodated party) and another party to the instrument (accommodation party) signs the instrument for the purpose of incurring liability on the instrument WITHOUT BEING A DIRECT BENEFICIARY OF THE VALUE GIVEN FOR THE INSTRUMENT, the instrument is signed by the accommodation party for acommodation 3-419(a)
95
Liability of Accommodation Party
An accommodation party may sign the instrument as maker, drawer, acceptor, or indorser, and ... is obliged to pay the instrument in the capacity in which the accommodation party signs.
96
Test for Accommodation Party
Did X receive a "direct benefit" from the value given for the note. Presumption of accommodation party.
97
Accommodation Status
A person signing an instrument is PRESUMED to be an accommodation party and there is notice that the instrument is signed for accommodation IF THE SIGNATURE IS an anomalous indorsement or ACCOMPANIED BY WORDS INDICATING THAT THE SIGNER IS ACTING AS A SURETY OR GUARANTOR.
98
Anomalous Indorsement
an indorsement made by a person who is not the holder of the instrument.
99
Must creditor pursue accommodated party first?
No!
100
Guaranteeing Collection
IF the signature of a party to an instrument is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of the obligation of another party to the instrument, THEN the signer is obliged to pay the amount due on the instrument to a person entitled to enforce ONLY IF
(a) execution of judgement against the other party has been returned unsatisfied,
(b) the other party is insolvent or in an insolvecy procedure,
(c) the other party cannot be served with process, or
(d) it is otherwise apparent that payment cannot be obtained from the other party
101
Accommodation Party Recourse
An accommodation party who pays the instrument is entitled TO REIMBURSEMENT from the accommodated party and is entitled TO ENFORCE THE INSTRUMENT against the accommodated party
102
Accommodated Party Recourse
An accommodated party who pays the instrument has no right of recourse against, and is not entitled to contribution from an accommodation party.
103
Contribution Amongst Cosureties
A cosurety's contributive share is the aggregate liability of the cosureties to the obligee divided by the number of cosureties
104
Insolvent/Unreachable Cosureties
The share of the Insolvent/Unreachable Cosureties are not calculated when determining liability.
The liability is divided by the reachable/solvent cosureties.
105
Contribution Among Co-Prinicpals
A party having joint and severable liability who pays the instrument is entitled to receive from any party having the same joint and several liability contribution in accordance with the applicable law.
106
Accommodation Party Defenses
An accommodation party may assert a defense against the principal in an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the PETE any defense ... that the accommodated party could assert against the PETE.
107
Non-Derivative Defenses for an Accommodation Party
An accommodation party may nit assert the prinicpal's discharge in insolvency proceedings, infancy, lack of legal capacity.
108
May a PETE recover from an accommodation party after releasing the principal?
If a PETE releases the obligation of a principal obligor in whole or in part, and another party to the instrument is a secondary obligor with respect to the obligation of a principal obligor, the following rules apply:
(2) the secondary obligor is discharged to the same extent as the principal obligor from any unperformed portion of its obligation on the instrument 3-605(2)
109
If Creditor agrees to take an amount below the amount owed may it later recover the difference?
No, a PETE, WITH OR WITHOUT consideration, may discharge the obligation of a party to pay the instrument by
(a) an intentional voluntary act such as surrender of the instrument, destruction, mutilation, or cancellation of the instrument etc. OR
(b) by agreeing not to sue or otherwise renouncing rights against the party by a signed record.
110
The terms of release provide that Bank retains its rights to enforce the note against Flanders
The principal obligor is discharged ... from any other duties to the secondary obligor. Unless the terms of the release provide that the PETE retains the right to enforce the instrument against the secondary obligor.
111
If the secondary obligor is not discharged to the same extent as the principal obligor, the secondary obligor is discharged to the extent of the value the consideration for the release, and to the extent that the release would otherwise cause the secondary obligor a loss
Thus, if SO could have recovered from PO any amount he paid to creditor (had PO not been discharged from his obligation to SO), SO has been harmed by the release and is discharged to the extent of that harm
If SO paid creditor $500 out of $1500 owed by PO to creditor and PO is discharged from his obligation to SO, then PO is harmed to the extent of $500 and is discharged to that extent.
112
Article 3 provides for that the release of the principal also releases the accommodation party. Can an accommodation party remain obligated to pay (waive its discharge) even when principal is discharged?
Yes. A secondary obligor (SO) is not discharged under this section if the SO consents to the event or conduct that is the basis of the discharge, or the instrument or a separate agreement of the party provides for the waiver of discharge under this section specifically or by general language indicating that parties waive defenses based on suretyship or impairment of collateral.
113
What effect does the extension of the due date have on the parties?
The extension correspondingly extends the time for performance of any other duties owed to the secondary obligor by the principal obligor under this article 3-605(b)(1)
The SO may perform its obligation to a PETE as if the time payment had not been extended or ... treat the time for performance of its obligation as having been extended correspondingly
114
What is Impairment of collateral
Impairing the value of an interest in collateral includes:
(a) the failure to obtain or maintain perfection or recordation of the interest in collateral; or
(b) release of collateral without substitution of collateral of equal value or equivalent reduction of the underlying obligation; or
(c) failing to perform a duty to preserve the value of collateral owed under Article 9 or other law, to a debtor or other person secondarily liable; or
(d) failure to comply with applicable law in disposing of or otherwise enforcing the interesting in collateral
115
PETE impairs collateral. What effect?
The obligation is discharged to the extent of the impairment 3-605(d)
116
The effect of an impairment when recourse debt is $70K and collateral is worth $38K
The difference between his out of pocket cost with the impairment (70K) and what it would have been without the impairment is (32K) is the amount of his harm (38K). So SO is discharged to that amount.
117
Calculating Collateral Harm
The difference between his out-of-pocket cost with the impairment and what it would have been without the impairment is the amount of the harm. So he is discharged to that extent
118
Can the impairment of collateral defense be waived?
A secondary obligor (SO) is not discharged under this section if the SO consents to the event or conduct that is the basis of the discharge, or the instrument or a separate agreement of the party provides for the waiver of discharge under this section specifically or by general language indicating that parties waive defenses based on suretyship or impairment of collateral.
119
If Payee cannot collect the cashier's check, will Drawer be liable on his contract obligation to pay the purchase price?
No! if a certified check, cashier's check, or teller's check is taken for an obligation, the obligation is discharged to the same extent discharge would result if an equal amount of money were taken in payment.
120
Effect of Underlying Obligation when paying with bank check
A party taking a bank check in payment exchanges their rights against the party giving the check for the right to collect payment from the bank.
Payment with bank check treated as if payment with cash.
121
What is a remitter?
A person who purchases an instrument from its issuer if the instrument is payable to an identified person other than purchaser.
122
Is a remitter liable on an instrument that he has not signed?
No. A person is no label on an instrument unless
(a) the person signed the instrument; or
(b) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person
123
Bert mails Sarah a personal check drawn by Boris but it never arrives. Can Sarah se Bert on the check?
No! Boris is the drawer of the check and the drawer's liability runs to a PETE. Sarah is not a PETE under 3-301
124
Bert mails Sarah a personal check but it never arrives. Can Sarah sue Her on the underlying obligation?
Yes! 3-310(b) addresses what happens to the underlying obligation when a "note or an uncertified check is taken for an obligation..." but the check is never "taken", because Sarah never recieves it. Thus 3-310 is not applicable, so nothing has had any effect on the underlying contract obligation.
125
Effect on Underlying Contract Obligation when note or uncertified check is given for payment go an obligation
If a note or uncertified check is used in payment of an obligation, the obligation is suspended to the same extent that an obligation would be discharged of an equal amount of money were taken...
126
Upon giving check to Payee, is Drawer liable on the check?
No! IF an unaccepted draft is dishonored, the drawer is obliged to pay the draft according to its terms at the time is was issued. The drawer's liability is conditional. It is only activated until the draft is dishonored.
127
Payee deposits check to bank and bank honors it. Can Payee sue drawer on the underlying contract obligation?
No! Suspension of an obligation continues until the dishonor of the check or until it is paid or certified. Payment or certification for the check results in discharge of the obligation to the extent of the amount of the check.
128
Payee deposits check to bank and bank honors it. Can Payee sue drawer on the check (liability of the instrument)?
An instrument IS PAID to the extent payment is made on or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument.
129
Suppose Payee deposits the check, the depository bank presents the check to the Drawee Bank, and Drawee Bank dishonors the check. Effect on the underlying obligation (liability on the sales contract)
If the check or note is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, the obligee may enforce either the instrument or the obligation.
The suspended contract obligation is revived.
130
Suppose Payee deposits the check, the depository bank presents the check to the Drawee Bank, and Drawee Bank dishonors the check. Effect on the check (liability on the instrument)?
If the check or note is dishonored and the obligee of the obligation for which the instrument was taken is the person entitled to enforce the instrument, the obligee may enforce either the instrument or the obligation.
The drawer's liability arises when the check is dishonored.
131
Issuance of the check in payment of some obligation initially "suspends" that obligation. What could happened next?
If the check is paid, payment operates as a discharge of the liability on the check and underlying obligation.
If the check is dishonored, the underlying obligation revives but the obligee can also recover on the instrument
132
B agrees to purchase widgets. Delivers check drawn by C. What happens if check is paid? What happens if check is dishonored?
If the check is paid B's liability on the contract is discharged and C's liability on the check is discharged
If the check is dishonored, B's liability on the contract revives. C is not a party to the contract and therefore has no liability. C's liability on the check is revived. B did not sign the check so he has no liability.
133
B gives O a check and the check is then lost or stolen. May O recover on the contract?
No! If a note or uncertified check is used in payment of an obligation, the obligation is suspended to the same extent that the obligation would be discharged if an equal amount of money were taken.
134
Can Payee require Drawer to issue another check if lost or stolen?
No. Her contract obligation is suspended, so she does not owe anything. Payee has no right to require her to issue a replacement check.
Obligation is not revived until the check check is dishonored
135
What rights does the Payee of a lost check have?
It can recover omg the lost check itself. PETE means
(a) the holder of the instrument; or
(b) a non holder in possesion of the instrument who has the rights of a holder; or
(c) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d) [the lost instrument provisions]
136
Lost Instruments 3-309(a)
A person NOT in possession of an instrument is entitled to enforce the instrument if:
(1) The person seeking to enforce the instrument was:
(a) entitled to enforce the instrument when the loss occurred; or
(b) has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when the loss occurred.
(2) the loss of possession was not the result of a transfer by the person or a lawful seizure; and
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service.
137
Basic Lost Instrument 3-309
| [FOR DUMMIES]
Under (a)
Did it have possession and was it a PETE when it lost possession?
Can it show the loss of possession was not due to a transfer or a lawful seizure?
Can it not obtain possession because it was lost, stolen, or destroyed?
Under (b)
Must prove terms of the instrument and right to enforce
Must provide "adequate protection"
